Title: Investment and Structural Transformation: The Case of China

Speaker: Associate Professor Kaiming Guo, Sun Yat-sen University

Time: September 8th, 2017 13:30–15:00

Venue: Conference Room 106B, Zhonghui Building (College of Economics, JNU)

Abstract: 

The decline in manufacturing has accelerated the rise of service during the recent decades in many countries including China. We propose investment-specific technological change as a new and fundamental force behind the process of structural transformation and particularly the rise of services, motivated by the facts that sectoral composition of investment is dramatically different from that of consumption and follows a secular trend with rising share of services and declining shares of agriculture and manufacturing. To assess whether the mechanism of investment is quantitatively important, we develop a standard model of structural transformation by incorporating an investment production function which employs output from the three broad sectors as inputs, and apply it to China's experience. Sectoral composition of investment in China moves towards services and away from agriculture and manufacturing during 1981-2014, with the investment rate at a high level of around 40 percent. We confirm that changes in sectoral composition of investment cannot be explained by the relative price of inputs alone. Investment-specific technological change that shifts the investment demand from agricultural and manufacturing goods to services is an important force. It substantially influences the process of structural transformation, and is particularly an important contributor to the catch-up of services since 2000. We also find that TFP growth in manufacturing is an alternative factor that affects sectoral composition of investment, which in turn decreases the share of manufacturing and increases the share of services. A model attributing all investment to manufacturing as commonly adopted in existing literature is misspecified for China. We suggest that for China and other emerging markets that must maintain high investment rate to catch up with the advanced economies, policies should be designed to upgrade sectoral composition of investment to boost the development of services.